There are many ways to analyze the performance of a company, some more popular than others. According to the Barney text the accounting method is the most popular way of measuring a firm's performance (Barney, 2002). Some of the reasons for the popularity could include the fact that accounting measures of performance are publicly available on many firms and they communicate a great deal of information about a firm's operations. Other methods of performance analysis include firm survival and the multiple stakeholder approach.
The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
The return on total assets (ROA) is an overall measure of profitability which measures the total effectiveness of management in generating profits with its available assets. This ratio indicates the amount of net income generated by each dollar invested in assets. The higher the firm's return on total assets, the better. Harley Davidson's return on total assets was 14.04% for 2001, 14.27% for 2000. These percentages are high and show an upward trend, this shows strong performance in this area for the past two years.
Return on equity (ROE) measures profitability from the stockholders perspective. The ROE is a calculation of the return earned on the common stockholders' investment in the firm. Generally, the higher this return, the better off the stockholders are. Harley Davidson's return on equity was 24.92% for 2001, 24.74% for 2000. They have sustained consistent, positive, returns for their shareholders for the past two years.
The next ratio we will review is gross profit margin. Gross profit margin (GPM) measures the percentage of each sales dollar remaining after the firm has paid for its goods. The higher the gross profit margin, the better. Harley Davidson's gross profit margin was 35.08% for 2001, 34.09% for 2000.
The fourth ratio we will analyze is earnings per share. Earnings per share (EPS) are the number of dollars earned during the period on behalf of each outstanding share of common stock. This ratio is valuable to shareholders because they usually think in terms of how many shares they currently own or how many they plan to purchase or sell. This ratio calculation reduces the company's net income to a percentage per share amount. Harley Davidson's EPS was $1.45 for 2001, $1.15 for 2000.
The next ratio we will review is the price earnings ratio. Price earnings ratio (p/e) measures the market price of each share of common stock to the earnings per share, or the amount that investors are willing to pay for each dollar of a firms earnings. The higher the price earning ratio, the greater is investor confidence. Harley Davidson's p/e ratio was 24.14 for 2001, 3.04 for 2000, and 28.41 for 1999. The drastic drop from 1999 to 2000 would be cause for concern but the ratio went up again in 2001. I included 1999 information to show the fluctuation.
The sixth ratio we will analyze is the debt to assets ratio which measures the extent to which debt has been used to finance firm's business activities or the extent to which a company's debt could be repaid by liquidating its assets. Harley Davidson's Debt to assets ration was 43.68% for 2001, 42.30% for 2000.
Another important ratio to consider when analyzing a firms performance is debt to equity. Debt to equity measures a firm's use of debt versus equity to finance a firm's business...